The lesson of today’s Daily Reckoning is that if you want to blow a massive asset bubble in order to make people feel wealthier, you had better do it in the real estate market and not the stock market. Liquidity driven gains in the stock market are bigger, faster, and more impressive in the short term. But they’re also easy come, easy go.

Look no further than the 22% fall in Japan’s Nikkei since it peaked in late May. That’s an impressive little bear market in such a short time. But then, the Japanese are famous for their efficiency. And yesterday was no different. The Nikkei 225 fell 6.5% for the session.

The index is now back to its early April lows. In other words, it’s back to where it was before new Bank of Japan head honcho Haruhiko Kuroda unveiled his grand plans for ending deflation in Japan. All his hot air succeeded in doing was pumping up stocks until all the air whooshed out in a few short weeks.

Whoosh!Source: StockCharts

It’s a bear market in Japan. It’s merely a bear cub market in Australia, at least for now. The S&P/ASX 200 index is down 10.6% since May 14th. It’s erased nearly all of its gains since starting the year at 4648. Mind you it’s still up 666.6 points since June 1st of 2012. That’s a 16.54% gain in just over twelve months.

But weeks like this will challenge the truisms of the investment industry. Our Family Wealth editor Vern Gowdie — who knows a thing or two about how the investment industry promotes itself — takes a closer look at the relationship between stocks prices and debt levels in one of today’s other articles. Vern’s working on a new project with us about how to preserve and grow family wealth during a secular bear market. Stay tuned.

In the meantime, not to pick over the scabs of a fresh wound, but the reader mail on Remembering the Future, our joint venture with economic forecaster Phil Anderson, continues to pour in. Warning! If you are not interested in the property debate, or Phil’s forecast for Australian house prices, you should quit reading now. Seriously. Quit. Just skip this article and head to Vern’s essay. This is your last chance.

Now, if you’re still with us, then welcome back. We have very little to say on the matter that we haven’t already said. But we will make one final point, before getting to the reader mail. And it has to do with transparency, a real battle of ideas, and the risks and rewards of independent publishing.

It’s incredible to us that a reader could think an independent publishing company could lose credibility by publishing a controversial idea. The whole point of not being accountable to advertisers is that we’re free to publish the ideas that are thought provoking and possibly useful. To shy away from controversy in order to avoid causing offence would make us…politicians.

But really, it looks a source of the outrage and incredulity is that Phil’s view on the direction of Aussie house prices is in direct contrast to the view put forward by your editor and several other Daily Reckoning analysts over the years. Have we all changed our tune in order to sell a DVD?

Certainly not. Ask the property bears around here and you’ll find they’re as committed as ever. But you’ll also find they had no objection to publishing Phil’s research because it reaffirms the point that we don’t have a company line that we ask our analysts to tow. We simply ask them to think hard, write well, and try to come up with ideas you’ll find useful.

And at the end of the day, that’s who ultimately decides our fate: you. The great thing about the online publishing business it’s that it’s completely transparent. We couldn’t hide if we tried. And we don’t want to hide, because then you couldn’t find us!

We want Australian investors to find us. We want you to read the various analysts we publish. We want you to think for yourself about your financial future — because nobody else will take it as seriously as you do. And ultimately, we want to publish ideas you find useful.

Mind you, we have no more insight than the next guy about what ideas will ultimately prove correct. But we’re going to work hard and think hard. And in the end, that’s why we’re proud of the product we’ve produced with Phil. It’s already made people think, even if some of those thoughts weren’t particularly nice.

But don’t take our word for it. Below are the good, the bad, and the ugly from your fellow readers. Some of them have bought the DVD and already watched it. Some have unsubscribed and don’t want anything to do with us ever again. In the interest of transparency, here’s what they all had to say.

‘Just wanted to thank Phil, the team at Port Phillip Publishing, for the amazing information on the Remembering the FutureDVD. It is so empowering to get such credible analysis that makes sense, and that we can use to hopefully position ourselves better financially into the future.

‘Now all I want is someone to give me analysis on where are the likely places in Australia to see the greatest capital growth!! Has Phil done that analysis?

‘So a bunch of property bears are selling info from a property bull. If he is correct it indicates that Port Phillip Publishing didn’t know what they were talking about this whole time.

‘But at least you can stand up and say ‘We told ya so’". If he is wrong, you can still stand up and say, ‘We Told ya so.’

‘All the while selling products, that, at least something must be right. But you guys are different to the mainstream financial brokers. Aren’t you?

‘Nobody can forecast. But everybody can jump up and say SEE ! When something happens.At least you are earning an income while the investments are in the toilet.

‘I have 3 subscriptions with you guys. I have had a couple of winners. But most not.

‘I am keeping them for now in a hope that something /anything will turn my disappointment around. But if you try to sell me info on how tulips are the next boom, I’m outta here.

‘I dare you to publish that.

‘Lots of love C.’

Told ya we’re for transparency.

‘Hi,

‘I disagree with Phil Anderson’s cycle theoryand how it relates to current circumstances, I’ll tell you why in a moment.

‘First, I wish to congratulate Port Philip Publishing for including this story, why?

‘Because it shows that PPP are living up to their philosophy of an ‘open editorial ideal’.

‘By allowing & encouraging their staff and newsletter contributors to have their own views and ideas, and to present a whole range of differing ideas to the readers of PPP, this is good for your business and good for your readers.

‘It helps to promote more informed decision making, after all, the world around us is made up of all kinds of people with different ideas, knowledge and experience. I don’t wish to live in a bubble and be fed only one line of thought.

‘Regarding Phil’s cycle theory…he states that Australia’s housing goes through a 14 year boom, followed by a 4 year downturn.

‘If this is correct, then theoretically Australia should still be in the throes of a boom, in fact, it should still have about 4 years to go! But this doesn’t seem to be the case.

‘In south east Queensland, the housing boom kicked off at the end of 2002, it basically flattened out 7 years later by 2009 and hasn’t really gone anywhere since, essentially maintaining its very high ‘median multiple’ – significantly unaffordable, ratio.

‘To have a 14 year boom cycle we should still be going strong and not turning down until around 2016/17!

‘His theory also didn’t seem to factor in the recent GFC.

‘The other idea which bothers me, and I’ve only read PPP’s brief on Phil’s theory, is that he is using centuries of historical cycles, which is fine, to a point but has he taken into account the unprecedented current situation of phenomenal money printing and market manipulation in the US, China, Japan & Europe.

‘Does his theory truly support the scenario that Australia and the world can maintain further major private debt burdens through increased easy credit?

‘Regards

Tony V.’

All good questions. Phil’s basic view is that the banks will create as much credit as society allows and that this credit will result in an increase in land values. We discussed some of these issues in a Q&A session in March. You can watch that here.

‘Hey are you for real? Who paid you off to dribble such crap? Are you blind to what is going on in the world? This is by far the worst pile of trash that you guys have printed to date. I thought you guys had a handle on what is really going on but it is clear that you really have none. The housing property cycle cannot and will not do what it has done in the last thirty years. It is economically unfeasible.

‘The price growth you are expecting will outstrip the availability of money so therefore your theory is flawed. Printed money backed by nothing does not and will never have the same value it had prior to printing. And the other assumption you made about history, is that we are now outside of what history has told us. The economic plan is vastly different to when these assumptions were made. Are you a Labor supporter? Or are you being paid big money to try and keep the property sector flourishing by telling crap to get people to invest on your words???

‘B.F.’

Your editor can’t legally vote in Australia, and wouldn’t if he could. The only people that pay us are our subscribers. We have at least one fewer of them, by all appearances.

‘Ordered the DVD of Remembering the Future and can’t wait to view. Comments like its ‘Bullshit’ and ‘you guys are losing credibility with this one’ just don’t cut it for me. ThoughI’m a newbie to the crazy world of Investing due to setting up my own SMSF, I’ve received a much better education from my PPP subscriptions than any Financial Planner or Fund Manager could offer in a million years.

‘I bet the knockers haven’t viewed or read the details of Phil Anderson’s conclusions, don’t knock what you haven’t got a clue about. I also read with interest Greg Canavan’s views of the Property markets dropping before they rise again, I don’t think that’s completely out of line with Phil’s statements.

One thing is for certain in our existence (apart from taxes and death) is that history DOES and always will repeat itself, I’m in a phase of soaking up every bit of Investment strategy advice (with a grain of salt off course) to build up my own portfolio decisions and strategies and don’t believe knocking so and so or the next guy will lead me closer to my own goals. Take in as much as you can from all the experts to provide you the ammo to create your OWN path. Keep up the good work guys.

‘Cheers

A.O.’

Huzzah!

‘I have read the pitch on the property boom that is about to hit Australia, and that it is following the cycles of the US and the UK. I’ve been impressed by the analysis and your courage to release something you have largely been opposed to for years.

‘I am also tempted to buy the DVD, but have always been anti direct property investment, other than the family home. I have one question. Does the analysis apply to New Zealand? Where do we fit in the property cycle, or are we so small that no one, including Phil, has done any work on it?

‘I read the Daily Reckoning every day, have done for several years, and have subscribed to Diggers and Drillersfor three years, but haven’t dipped my toes into the water with any of the recommendations yet. I enjoy your largely contrarian approach. It more than balances the rubbish we get from conventional press most of the time.

‘An early response would be appreciated.

‘Kind Regards

Graeme O.’

Thanks for the letter Graeme. We’re doing a follow up Q&A and will ask Phil about whether his analysis applies to New Zealand.

‘Hi Dan Denning,

‘Just wanted to put in my two cents worth.

‘The problem I have with a new property boom is this.

‘Where does the money come for the purchase of properties come to push the prices back up?

‘The beginning of the last boom around the late 1990’s the average house in most suburbs i.e. three bedroom fibro house cost around 2 and a half or so years of minimum wages.

‘Now they cost around 8 years of minimum wage. So either the money has to come via investors from overseas and that would only happen after a massive devaluation of our currency against the USD or the wages have to surge dramatically to give the potential for ordinary people to purchase again and this would not happen until unemployment dropped after a major increase. Australia has some of the highest wages in the world which only currency devaluation will correct.

‘We have not had high unemployment and the last boom has left us with low interest rates still. Most people do not wish to keep getting themselves deeper and deeper into debt.

‘So either the wages go up or the interest rates plummet with the banks being willing to lend more money. The later depends on the overseas money market staying open to low % interest rates as a wage increase is unlikely while Australia is trying to recover from a crash in exports.

‘I suspect we will see a drop in interest rates by the RBA as the inflation drops then just when we least need it there will be a surge in overseas % rates leaving many people in Australia exposed to massive loans and repayments increases.

‘If the currency drops to 40 or 50cents US in the Aus$ there may be major buyers come in an purchase for rental purposes.

‘Currency moves always tend to overshoot.

‘My friend in St. Petersburg, Florida says that a major overseas buyer came in during a bottom in the real estate market last year 2012 and purchased 700 houses at around USD $100,000 to $120,000 ea.( from a high of $ 270,000 USD each during the boom years.)

‘Buyers like this are happy to purchase hold houses get a return then sell off for a small capital gain and take their money back overseas for a large tax free currency gain when the overreaction or currency devaluation levels out or starts to climb back due to improved exports and small business manufacturing finally picks back up.

‘This also happened in Melbourne during the global financial crisis. Buyers came in at 60 to 70 cents US in the Aus. They bought cheap. Prices went up at least 20 % and the currency went up to US 1.10 to the Aus. They sold out many properties and returned their money for +20% property gain plus 60% currency gain on top of that. They also collected rents over this period. CGT Tax on the property gain but not on the currency gain when reverting to the USD. Not a bad return for 2 years or so from 2008 to 2010.

‘I do not believe the price of property can surge much higher until there has been a major pull back. This would take a couple of years at least.

‘Regards,

Ian P’

And finally.

‘Hi Dan

‘I have been a subscriber to your newsletter for some years and the latest Courting Property Controversy was of interest as I have followed Phil Anderson’s business ventures with interest over the years and I am pleased to hear he is doing well in Melbourne.

‘I am a Real Estate Agent in his home town I also have a graph which came under the notice of the public in 1872 and was prepared by a Mr Tritch the numbers have an uncanny similarity to Phil’s.

‘I received it in a newsletter which I was subscribing to in the early 1960s it was similar to yours no internet then it was a typed booklet.

‘I have found over the years in real estate and confirmed by many developers personally that the profits they made over time was from the rising land value only and the reason I believe real estate will continue to hold its value is building costs have increased and the population is growing.

‘I look forward to your next column

‘Kind Regards,

Tony L.’

Thanks Tony. Send the graph though if you could. It sounds interesting. Your editor’s next column will be in three weeks. We’re headed to America to visit family, take a holiday, and see whether the real estate recovery there is for real. Until then!

IMO only once the liquidity impetus and trickle down effect on debt servicing is over half way to run out, and people are being kicked out onto the street (and/or hyperinflation is running), will it be time to buy the cheapest apartments in firesales after which time ongoing rents may be secured by government safety nets.

Phil Anderson’s theory is hard to accept given that our housing market is already so overpriced, though mind you, I would have said the same in 2008 before Kevin Rudd reinflated the housing bubble that was just starting to deflate. You guys at PPP had all the reasons why the next direction for property was down, and it all made sense. But what is it about Phil Anderson that made you suddenly give me so much credence? Or is it just that you wanted to provide some alternate view as a publicity stunt?

Having said all that, IF prices start on the 14 year boom touted by Anderson, it will not be because of cycles or fundamentals. The only way it could happen is if the government steps on the immigration accelerator even harder than before, and opens the gates to foreign investment even wider than what they are now, if that is at all possible. Or if they come up with some FHOG of at least $50,000 or $100,000 in an effort to get people to take on even more debt than ever. Or they bring in some sort of multi-generational mortgage of say, 100 years in a desperate bid to keep the bubble aloft. Or they could increase the amount of negative gearing subsidies allowed to investors, enabling them to take on higher debt.

Any or all of these ideas are possible, and it wouldn’t be too surprising if any of them were implemented. But to suggest that we are on the cusp of a real estate boom based on cycles, when we’re still in the same cycle we’ve been in for the past 20 years – I would have expected better from PPP.

Nice to see the transparency… I can now see clear, all the way to the moon. I did not know The DR was the word of God. If you do not like the views of a particular Financial Paper…. NO NOT WHINGE just move on to the next article.
LOL, if you prefer ignorance, only read and listen to what you believe in.
I am into Bullion, many thanks DR, why? because it is for the long haul(still buying) and shit happens on the foot path. I am a dog owner and a history man.
2020 and 3 bedroom house is $5 million bucks? 20 ounces of Gold should cover it. The DR may just be the word of God after all.

G’day, Ross. Haven’t been absent, but I figure they tired of my silly aliases (after banning me). I killed off most of these AKAs, with obviously outrageous quips. Interesting to see transparency re-emerge!